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Argentina ETF Breaking Out of a Slump

After oscillating back and forth from a sideways trading range, the Argentina exchange traded fund has rallied to its 52-week high, with bargain-hunting investors trying to get pick up an undervalued emerging market.

The Global X FTSE Argentina 20 ETF (ARGT) has gained 15.6% over the past month and surged 24.4% from its recent June 24 low.

“After Sunday’s elections and with a likely change of course in the economy, there were orders from abroad,” Adrian Mayoral, a trader at local brokerage Mayoral Bursatil, said in a Wall Street Journal article. “Some outside investors want back in [to Argentina]. A lot of local assets are undervalued and there are a lot of [investors] who want to invest.”

Trang Ho for Investor’s Business Daily points out that ARGT has upside potential as a reversion-to-the-mean or “catch-up” play as the fund has fell behind other global markets. ARGT

The Argentina ETF’s outperformance is partly attributed to two of its largest holdings, Telecom Argentina (TEO) and Banco Macro (BMA), which have gained 15% and 16% this week, respectively. TEO is 5.6% of the ETF and BMA is 5.2%.

Potential investors should be aware that ARGT has a hefty weighting in Tenaris 20.1% and Mercadolibre 20.0%.

According to Alta Vista Research, ARGT component stocks have a projected earnings per share growth of 33.5% this year and rise 20% in 2014 after falling 25% in 2012.

Investors should also know that the government says the economy is running with a 10.5% inflation rate. Private economists, though, believe the inflation rate is closer to 25%. Nevertheless, it is still low compared to the country’s historic average of 207%.

“Inflation destroys P/E ratios, because the present value of future earnings is less, and the earnings are of poor quality,” Michael Krause, president of AltaVista, warned in the IBD article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.